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Annex 2 Non-Confidential Version ANNEX 2 NON-CONFIDENTIAL VERSION APPENDIX 1: OFCOM’S INCONSISTENT REFERENCES TO RELEVANT MARKETS 1.1 One of the most surprising features of Ofcom’s approach to market definition in the Consultation Document is the inconsistent (and largely haphazard) way in which market definitions are stated, and the fact that a number of the statements on the market definitions that Ofcom has reached comprise products that are not actually supplied to consumers. 1.2 Set out below is an indication of the extremely large variety in the ways in which Ofcom expresses its findings in relation to relevant markets, separated according to whether they relate to sports, film or basic pay TV-only services.1 Sports • “There is a narrow economic market for premium sports retailing (sic) in the UK, which does not include FTA or basic-tier TV channels”2 • “…the retail market for packages containing premium sports…channels“3 • “It remains likely that there are separate retail and wholesale markets for the supply of premium sport… channels. The market for premium sports channels is likely to include both Sky Sports and Setanta, although we cannot rule out a narrower market for Sky Sports alone”4 • “the premium sports content market”5 • “the sports…market”6 • “the wholesaling of premium sport pay TV channels”7 • “a separate market for the retailing of pay TV packages containing premium sports content”8 • “the premium sports retailing market”9 • “in the retailing of premium sports rights”10 • “the wholesaling of premium sports channels”11 1 We note that the following quotations are Ofcom statements in relation to the relevant markets it considers exists (i.e., it does not include references in the Consultation Document to findings on market definition by other regulators in the past). 2 Paragraph 4.37 of Annex 13. 3 Paragraph 5.54. 4 Paragraph 5.23. 5 Paragraph 5.58. 6 Ibid. 7 Paragraph 4.48. 8 Paragraph 5.15. 9 Paragraph 5.32. 10 Paragraph 5.33. 11 Paragraph 5.39. ANNEX 2 NON-CONFIDENTIAL VERSION • “the wholesaling of premium sports rights”12 • “the wholesaling of premium sports content”13 • “the premium sports pay TV market”14 Movies • “…the retail market for packages containing premium … movies channels (sic)”15 • “…retail and wholesale markets for the supply of premium… movie channels”16 • “…the premium movies retail market”17 • “the premium movies market”18 • “the… movies market”19 • “… premium movie bundles”20 • “the wholesaling of subscription premium movie channels”21 • “the retail premium movies markets”22 • “the premium movies retailing market”23 • “the wholesale market for premium movie content”24 • “the wholesale market for premium movies”25 Basic pay TV services • “It seems likely that basic-tier pay TV and free-to-air TV are also in separate retail markets”26 • “…the wholesale market for basic-tier pay TV”27 12 Paragraph 5.43. 13 Paragraph 5.52. 14 Paragraph 5.63. 15 Paragraph 5.54. 16 Paragraph 5.23. 17 Paragraph 5.54. 18 Paragraph 5.58. 19 Ibid. 20 Paragraph 4.82. 21 Paragraph 4.90 of Annex 13. 22 Paragraph 5.53. 23 Paragraph 5.63. 24 Paragraph 5.64. 25 Paragraph 5.69. 26 Paragraph 5.23. 27 Paragraph 5.24. 2 ANNEX 2 NON-CONFIDENTIAL VERSION • “packages containing only basic-tier TV channels”28 • “stand-alone basic-tier pay TV”29 • “wholesaling of basic TV channels”30 • “subscriptions to TV packages containing only basic channels”31 • “stand-alone basic pay TV services”32 Other • “the market for premium wholesale channels.”33 • “the wholesale channel provision market”34 1.3 In relation to a number of these statements, we note that these comprise services that are not actually supplied to consumers. Most notably, as Ofcom is aware35 Sky’s premium sports channels and premium film channels are provided to consumers as part of broader packages that also include basic pay TV channels. It is, therefore, extremely odd (to say the least) to reach a market definition that is: “a narrow economic market for premium sports retailing (sic) in the UK, which does not include FTA or basic-tier TV channels”. 36 1.4 It is similarly strange to conclude that there is a relevant retail market for either “premium movies” or “premium movie channels”. 1.5 Furthermore, a significant problem with Ofcom’s approach is that it does not address pay TV packages that include both premium sports and premium film channels (both at the wholesale levels). All the Ofcom’s various approaches to market definition refer to one or other of these types of channel. 28 Paragraph 5.54. 29 Ibid. 30 Paragraph 5.56. 31 Paragraph 5.71. 32 Paragraph 5.88. 33 Paragraph 6.77. 34 Heading preceding Paragraph 6.22. 35 See, for example, Paragraph 4.31. 36 Paragraph 4.37 of Annex 13. 3 ANNEX 2 NON-CONFIDENTIAL VERSION APPENDIX 2: FAILURE TO EXPLAIN THE CONCEPT OF “MUST HAVE” CONTENT AND CHANNELS 2.1 A significant pillar in Ofcom’s approach to the assessment of relevant markets and market power is the proposition that some types of programmes, services and television channels are “must have”. For example, Ofcom states: “We have therefore considered whether narrow economic markets exist for specific ‘must have’ content (premium sport and movies) at both the retail and wholesale level.”37 2.2 This statement makes it clear that one of the principal starting points of Ofcom’s approach to market definition in this case is a presumption that there is such a thing as ‘must have content’. In such a situation, it might be expected that Ofcom would explain what it means when it uses this term and it is therefore highly surprising that Ofcom provides no such explanation. 2.3 In relation to “the retail level” it is wholly unclear what it might mean for television programmes to be “must have”. In the absence of any discussion or definition of the concept by Ofcom, it is possible only to speculate on what might be intended by it.38 2.4 As a starting point, it is certainly possible to say what it does not mean: clearly, the concept of “must have” cannot be intended to mean ‘essential to survival’, and it is improbable that Ofcom means that consumers would be willing to pay infinite prices to watch particular TV programmes. 2.5 An attempt to discern the meaning of this term from the context in which it generally is used in Ofcom’s Consultation Document leads to the conclusion that there are potentially two (mutually exclusive) meanings that Ofcom attaches to it. Either: (i) that some particular types of content are valued very highly by all (or perhaps nearly all) consumers. Such an interpretation is suggested, for example, by the total lack of qualification around the use of the term in relation to consumers; or (ii) that at least some consumers have a high willingness to pay to watch particular types of programmes on TV. Such an interpretation is suggested by significant parts of Ofcom’s consumer research, which asks consumers essentially how much they value watching particular 37 Paragraph 1.3 of Annex 13. 38 We overlook in this appendix entirely inexplicable uses of the term by Ofcom – for example the observation that, according to Ofcom, around 88% of consumers in an Ofcom survey regarded “content” as being “must have” or, even more bizarrely, that around 53% of pay TV subscribers surveyed regarded “price/cost” as “must have”. (See Figure 12 of the Consultation Document.) ANNEX 2 NON-CONFIDENTIAL VERSION types of programming on a scale of “must have” through to “nice to have” - in other words, seeking to determine a preference ranking. 2.6 Clearly, the former interpretation is entirely implausible and belied both by common sense, and Ofcom’s consumer research. Even amongst consumers who said that specific programmes or types of programme were important to them, the programme most often cited as “important” was Coronation Street (38% of respondents), and the most mentioned genre of programme was sports with 45%, citing it as “important”, ahead of soap operas with 39%. The proportion citing each of these as “must have” is not available from the information provided to Sky, but it is likely to be significantly lower.39 2.7 If the latter interpretation, then, is what Ofcom means when it refers to content being “must have”, the proposition is both (a) trite and (b) irrelevant to market definition. It implies simply that there is a demand curve for particular types of programming, which is entirely what common sense would suggest. The fact that there are dedicated fans of particular types of programming, who have a high willingness to pay to view particular types of content on TV, is entirely unremarkable. The same can be said of most goods, and most TV programmes – though, as far as Sky is aware, the epithet of “must have” is not generally applied to other types of goods or TV programmes simply because some people like them a lot.40 2.8 Moreover, as explained in Annex 2, focusing on the preferences of those consumers for whom watching particular types of content on TV is very important is an erroneous starting point in an analysis of market definition. It is the preferences of those least attached to products (marginal consumers) rather than the preferences of those who are most attached (infra-marginal consumers, or dedicated fans) that matter for market definition. Accordingly, if this interpretation of what Ofcom means when it presumes that some content is “must have” and uses this presumption as one of the principal starting points for its analysis of market definition, then it leads directly to Ofcom’s perpetration of the ‘toothless fallacy’.
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